Positive US Rate Outlook Boosts Risk Sentiment

Asian shares rose on Tuesday, following the positive cues from Wall Street overnight as growth stocks looked enticing ahead of major tech earnings. Mounting expectations over a less aggressive Federal Reserve stimulated appetite for risk, magnetising investors towards the equity space. However, markets in mainland China and Taiwan remain closed for the Lunar New Year holiday and reopen for trading on January 30. European futures are pointing to a positive open this morning after finishing higher in the previous session, and this could trickle back down to Wall Street later today.

In the currency space, the dollar ticked lower while the euro is lingering below 1.09 after yesterday’s attempted breakout. Oil bulls seem to be drawing strength from rising demand hopes as China’s economy reopens, while gold remains supported by US recession fears and bets of slower rate hikes in 2023.

The next few days promise to be eventful for equity markets thanks to corporate earnings, with Microsoft reporting its results after the bell today and Tesla releasing its earnings late Wednesday. It is also a data-heavy week with economic reports from Europe and the United States in sharp focus, including PMI surveys today and US fourth quarter GDP on Thursday. Regarding central bank meetings, all eyes will be on the Bank of Canada rate decision tomorrow which is expected to conclude with a 25-basis point rate hike.

EURUSD gearing up for a breakout?

This could be a volatile week for EURUSD thanks to key economic data and speeches from financial heavyweights.

The discussions around monetary policy among officials at the Federal Reserve and European Central Bank continue, with focus increasingly drawn to their policy meetings next week. On one side of the coin, the euro continues to draw strength from a weaker dollar, high inflation in the Eurozone, and a hawkish ECB. On the other side, repeated signs of easing inflation in the US have fueled speculation around a less aggressive Fed. The narrowing monetary policy divergence between the Fed and ECB could translate to further upside for the already bullish EURUSD.

Much attention will be directed towards not only the pending Eurozone and US January PMIs today, but also ECB President Lagarde’s speech which may influence the currency pair. Regarding the technical picture, prices remain bullish on the daily charts with resistance found at 1.09. A solid breakout and daily close above this point could signal a move toward the next key level of interest at 1.12.

Currency spotlight – GBPUSD

Yesterday was a choppy affair for the GBPUSD as prices bounced within a range just below 1.24. Nevertheless, the outlook remains bullish on the daily charts due to the recent series of consistent higher highs and higher lows. There could be some action on the GBPUSD this morning thanks to the UK and US January PMIs. However, bulls remain in a position of power with support found just above 1.23. If the currency pair has the strength to advance decisively beyond  1.24, an incline toward the 1.26 region could become reality. Should the upside lose steam and dip below 1.23, prices could sink back towards 1.2170.

Commodity spotlight – Gold

Gold bulls continue to draw confidence from US recession fears and expectations around a less aggressive Federal Reserve. The precious metal certainly remains on a roll, securing five consecutive weekly gains, and could push higher if the fundamental drivers remain unchanged. A weaker dollar and soft US economic data could further sweeten appetite for gold over the next few days. Looking at the technical picture, prices remain bullish making fresh 9-month highs this morning and could test $1950 and beyond.